Background:
Recent notification by the Ministry of Finance has maintained customs duty on domestic LPG & PDS SKO as nil while increasing the customs duty on crude from nil to 5%. This implies a negative tariff protection of 5% to SKO & LPG, which together constitute over 17% of consumption barrel.
In addition, the NCCD (National calamities Contingency Duty) of Rs.50 per MT on imported crude is also retained. The NCCD is not passed on to the consumers in the pricing structure and is absorbed by the refining industry. Worse still, even on exports the refineries absorb this element.
The implications of the changes in tariff are as detailed below.
Impact on the refining industry:
1. Negative protection (including NCCD) is against the considered opinion of economists and experts:
Various industry & tax reform committees set up by the government have concurred on eliminating negative protection on finished goods in order to promote domestic industry. Some highlights from a few notable committees is given below:
Tax Reforms Committee, Dr. Raja J Chelliah Aug 1992
Government should rigidly adhere to one basic principle, namely, while consumers should not be asked to bear undue burden through unwarrantedly high protection to particular groups of producers, domestic producers should not be exposed to unfair competition in the name of not adding anything to the cost of ?essential goods?
Strategic Planning Group on Restructuring of Oil Industries (R Group), Dr. Vijay Kelkar Sep 1996
The current tariff rates contradict the rational tariff structure of keeping import duty on raw materials lower than that on final products. In the case of petroleum sector, the import duty on crude is 27% ad-valorem which the import duties on finished product are a maximum of 32% on MS, HSD and ATF; nil on Naphtha and SKO; and only 10% on LPG. Such a duty structure is somewhat perverse in the sense that it provides a negative rate of protection to refining sector PSUs while giving a high rate of effective protection to private sector petrochemical companies?
Expert Technical Group Nirmal Singh 1997
The committee suggested eventual tariffs of 15% on MS, HSD, LDO, ATF , 10% on LPG & 0% on SKO while maintaining crude at 0%, thus ruling out negative protection for any finished product.
Kelkar Task Force, Dr Vijay Kelkar 2002
The committee suggested eventual tariffs of 10% on petroleum products & 5% on crude, thus ruling out negative protection for any finished product.
The anomalies of negative tariff protection that existed in the petroleum industry were gradually removed in line with the above recommendations as is evident from Exhibit 1.
Exhibit 1: Phasing out of negative duty protection on petroleum products
2. Negative protection will force refineries to change the production pattern leading to import of LPG & SKO
The country is refining surplus. The refining capacity is 178 million tonnes (MMT) and the expected demand of petroleum products is about 135 MMT tonnes in 2009-10. The production capacity for LPG (about 9.5 MMT) is not enough to meet the demand fully (about 12.5 MMT), forcing imports. Fiscal incentives encourage production of LPG will retain imports at this level. Now that negative duty protection is a reality, for LPG & SKO, refineries may adjust their production more in favour of MS and ATF for exports. This will increase the quantum of imports in the coming years. This will lead to additional foreign exchange outflows in respect of higher product prices and net freight payable on LPG and possibly SKO imports.
3. Negative protection is detrimental to the high investments required in the refining sector
However, refining capacity is higher than demand at present; economic growth projections will soon necessitate additions to refining capacity. In addition, India is likely to become a refining hub. The expansion needs investment. With SKO & LPG constituting around 17% and fuel & loss around 8%, refineries will not be able to recover duty paid on crude on 25% of the production barrel. This will be a heavy burden on refining sector and will act as a disincentive for fresh investments required in the sector. Negative protection on LPG and SKO may result in our revisiting the years when we imported finished products heavily.
The profitability of refining industry has been declining. Older and less efficient refineries may close down, which may take several years. In the meantime, our refining industry must become financially strong to become an international force to reckon with. Saddling them with negative protection at this time may mean we lose the opportunity of becoming an efficient refining hub in a few years down the line. We stand to lose a great opportunity and hence the negative protection needs to be removed.
4. Negative protection does not exist for any petroleum products anywhere in the Asia Pacific region
Conclusion
In order to encourage investments in domestic refining, strengthen our refining industry and discourage unnecessary imports it is imperative that the negative protection on LPG & SKO be removed. There is no justification to continue with NCCD, unless it is recovered from the ultimate consumers via identified increase in refinery prices to oil marketing companies.
_________________________________________________________________________________
Posts
No comments:
Post a Comment